Philadelphia's school commission borrows $300 million to pay its bills

By Kristen A. Graham, Inquirer Staff Writer

Posted: November 09, 2012

The Philadelphia School Reform Commission moved Wednesday to borrow $300 million - money it needs just to pay teachers, heat buildings, and buy books for the rest of the school year.

Chairman Pedro Ramos made it clear that the SRC's back was to the wall and that the state of its finances constituted "dire circumstances" for the district.

"I couldn't be more unhappy that we're in a situation where it's necessary to do a borrowing for the purposes of merely paying our bills," Ramos said.

The bond sale the SRC unanimously authorized at the Wednesday special meeting comes with a hefty price tag - an additional $22 million in debt service annually for 20 years, beginning in 2014.

It's the second time in a decade the district has had to borrow money to keep schools open - the last deficit financing occurred in 2002 - and officials say the school system's credit card is maxed out.

"Some people think the solution is that we can just keep borrowing, and we really can't," Ramos said.

Because it represents nonrecurring revenue, this bond sale puts the district hundreds of millions in the hole for the 2013-14 school year just three months into the current school term.

The message? The district's current spending is not sustainable; the bond sale is a large and very expensive Band-Aid, but it only buys the district a little time.

"Extremely difficult" choices are approaching quickly, SRC member Wendell Pritchett said, and "we're going to have to make them. We don't have any choice."

The SRC will soon be confronted with a whopper of a decision - deciding how many and which of the district's 200-plus schools should be closed.

Officials have said they must shed roughly 40 schools at the end of this year to save money and "rightsize" operations in a district that has lost tens of thousands of students to charter schools in the last decade but did not shrink operations to compensate.

Superintendent William R. Hite Jr. said Wednesday that staff would make public their school closing recommendations in the next few weeks, but possibly not until the first week in December.

In financial terms, officials said, the bond sale was successful - well received in the market, with more than 50 investors placing initial orders, said Christina Ward, deputy chief financial officer.

Though the district is a financial shambles, its recently adopted five-year plan and greater public confidence in the path of a relatively new school governing body and administration bolstered the bond offering, officials said.

The current SRC, in place for roughly the last year, has begun to right the course, and that shows in investors' reception of the district's bond offering, Hite said.

"Nobody's going to invest in something they think is broken," Hite said.

And a state "intercept" program also gave investors confidence - guaranteeing creditors will be paid, as state aid is automatically sent to creditors to cover the district's debt if it fails to meet obligations.

The state intercept, Ramos stressed, was crucial to the district's bridging "the gap between the reality of our day-to-day life, living in an enormous operating debt," and being able to borrow against it.

How did the district arrive in its current financial predicament?

A failure to cut costs as it shrank was a factor; certainly big cuts in state and federal revenue and the brutal economy have contributed to the fiscal woes. But Ramos has acknowledged that "poor fiscal policy" - too much borrowing, too much spending on the part of prior administrations - also landed the district in its tight spot.

The school system could face a $1.35 billion deficit over the next five years if changes are not made, the five-year plan warns.

School closings are a major component of that plan, but so are major givebacks from labor forces, including the Philadelphia Federation of Teachers.

"Everybody has to make concessions," Hite said. "We can't continue to operate in this manner."

Existing salary and benefit structures were agreed to "in high-revenue times," said Hite. "Now we don't have the ability to sustain that structure."